Beware the New Corporate Tax-Cut Scam: LIFT Is A Big LIE

First it was Fix the Debt, with tax-dodging corporations “leading the charge for massive new corporate tax cuts paid for with cuts to Social Security, Medicare, and Medicaid.” Now there’s a new “LIFT America coalition,” pushing for massive, massive corporate tax cuts, without bothering about cutting benefits. LIFT stands for “Let’s Invest for Tomorrow,” but as Citizens For Tax Justice (CTJ) points out, it really ought to be called LIE, for “Let’s Invest Elsewhere.”

The executives who run the giant multinationals want to be let off the hook for paying taxes on profits they make outside our borders. As an Apple executive said to The New York Times, giant multinationals “don’t have an obligation to solve America’s problems.” And to prove it, American corporations are holding $1.7 trillion in profits outside the country – just sitting there – rather than bringing that money home, paying the taxes due and then paying it out to shareholders or using it to “create jobs” with new factories, research facilities and equipment.

The LIFT Coalition

This corporate lobbying coalition claims that “antiquated U.S. tax laws are threatening America’s economic competitiveness.” They want their taxes lowered with a “Territorial Tax System” so they “pay home country tax rates that are competitive with those paid by foreign business rivals” (i.e. little or no taxes on their profits).

The LIFT website is full of lobbyist-speak, like “reform,” “modernize,” and “attract more investment.” When you hear lobbyists talk about “reforming” and “modernizing” things, it means that by the time they get done you’re going to have less money and the giant corporations they pay them are going to have more.

The short version of what LIFT wants: Lower corporate taxes here, plus no taxes on profits they make outside the country. These are the “antiquated U.S. tax laws … threatening America’s economic competitiveness” they are talking about. And they very well might have the money to push this through the Congress.

What this means is if we want to have schools and universities, roads and bridges, courts, police, military and the other things that support their companies, don’t expect them to cough up money for them. They are opting out of the social contract that asks them to help fund those things that helped them prosper. It’s all on us.

LIFT also relies on videos and materials from the Tax Foundation and the Manhattan Institute. Representatives of the Koch Foundation and LIFT member Eli Lilly are on the board of directors for the Tax Foundation. The Koch Foundation and other “conservative movement” funders fund the Manhattan Institute.

Their argument is a new form of the old “cutting taxes will increase growth” argument. Except, of course, there is no evidence and certainly no historical demonstration that cutting taxes increases growth while there is plenty of evidence and historical experience that cutting taxes cuts growth.

Corporate Profits Record High – Corporate Taxes Low

Here is the economic background as LIFT comes onto the stage. Corporate profits are at record levels, while corporate taxes are very, very low – an “effective” rate of just 12.1 percent but down to zero in so many cases. Corporate tax revenue accounted for 30.5 percent of federal revenue in 1953, but by 2011 the share of corporate tax revenue had fallen to 7.9 percent. But for We, the People jobs are scarce and wages are stagnant and falling.

Corporations are holding $1.7 trillion outside of the country because they would have to pay the taxes due on those profits if the cash was brought home, which would mean helping support the schools and police and courts and military and universities and research and all the other things that enable them to prosper.

But the giant, multinational corporations are claiming they can’t compete if they have to pay taxes. So the inside-the-Beltway consensus (the same crowd that told us we should invade Iraq and now says we have to cut Social Security and Medicare) is that we need corporate “tax reform” that lowers rates, and is pushing a territorial tax system that lets corporations bring back profits made outside the country without taxation.

Even Lower Corporate Tax Rates?

The LIFT coalition is pushing for lower corporate tax rates. They want the top U.S. corporate tax rate (historically as high as 53%, and 46 percent when Reagan took office) reduced from the current 35.6 percent to 25 percent — a reduction of about 30%! They claim this will make the United States “a more attractive place to invest and create jobs.”

Of course giant, multinational corporations have not been paying anywhere near 35.6 percent – and so what if they were? (And obviously — just look around us — they haven’t been “creating jobs,” either.)

Between 2008 and 2011, 26 major American corporations paid no net federal income taxes despite bringing in billions in profits, according to a new report (PDF) from the nonprofit research group Citizens for Tax Justice. CTJ calculates that if the companies had paid the full 35 percent corporate tax rate, they would have put more than $78 billion into government coffers.

The main focus of the LIFT coalition is on a territorial tax system. They propose “reforming” the tax system so profits earned outside the U.S. are not taxed here. Currently companies have to pay the difference between whatever taxes were paid in countries where profits were supposedly made and the U.S. tax rate. So if they paid a 10 percent tax rate in Lowtaxistan they would have to pay their U.S. rate minus 10 percent when the money comes home.

Companies like Google, Apple, GE and many others are holding $1.7 trillion out of the country untaxed, which was made from moving jobs, factories, processes, services and profit centers out of the country to China and to tax havens elsewhere. This new “territorial tax” system would let them bring profits back with no taxes on the money made from moving manufacturing out of the country.

Of course, letting them out of paying taxes on profits earned outside the country would mean that companies would start shifting all of their profits and operations out of the country, but who’s counting? CTJ suggests that this coalition’s name should be changed to Let’s Invest Elsewhere because “because that’s exactly what American multinational corporations would be encouraged to do under a territorial tax system.” Simple fact: Letting companies off from taxes on profits earned outside the country is a huge incentive to move jobs, factories and profit centers … wait for it … outside the country, (or just make it look like their profits are earned outside the country).

Currently, U.S.-based multinationals owe U.S. taxes on the income they generate at home as well as overseas; they get a credit for the foreign taxes they pay so that they aren’t taxed twice on the same income.

But multinationals don’t owe tax on much of their foreign profits until they bring them back to the United States. So they can — and many do — defer U.S. tax indefinitely by keeping those profits overseas. …

First, a territorial system would create greater incentives for U.S.-based multinationals to invest and book profits overseas rather than at home. …

Second, by encouraging capital to flow overseas, a territorial system would risk reducing wages at home. …

Third, a territorial tax system would risk higher budget deficits by draining revenues from the corporate income tax. …

Fourth, a territorial system would risk higher taxes on smaller businesses and domestic businesses. …

This plan is particularly dangerous to American wages and jobs — YOUR wages and job — as well as any American companies that don’t export their profit centers. This threat is not limited to the blue-collar jobs that have been disappearing, it also threatens the professionals, “knowledge workers,” designers, innovators and others who contribute to corporate profits here in the U.S.

The territorial tax proposal asks for no taxes on foreign profits of American corporations. This system would encourage and practically force companies to move profit generation (innovation, intellectual property, etc.) out of the U.S. This gives corporations an incentive to move everything that makes them money out of the country — every profit center, every job, every factory, every designer, inventor, and so on.

This plan only benefits the giant multinational corporations — and helps them kill off even more American jobs and smaller businesses. And without those wages and taxes our infrastructure, schools, police and fire protections, and everything else here will decline even more.

The 63 Fix the Debt companies that are publicly held stand to gain as much as $134 billion in windfalls if Congress approves one of their main proposals — a “territorial tax system.” Under this system, companies would not have to pay U.S. federal income taxes on foreign earnings when they bring the profits back to the United States.

Retroactive Tax Holiday — Hand Them Hundreds Of Billions

LIFT’s legislative proposal is not just about a new system for future taxation, it also gives these companies a tax break of hundreds of billions of dollars on past profits. A trick buried in this proposal is retroactive, rewarding corporations who used tax-dodging schemes to move profits offshore by giving them a “tax holiday” – really a holiday gift of hundreds of billions of dollars for dodging past taxes! Specifically,

“All pre-effective date, tax-deferred foreign earnings of foreign companies owned by 10 percent U.S. shareholders would be taxed once at a low tax rate (similar to a repatriation holiday). U.S. companies could pay this tax ratably over eight years, and these earnings could then be brought back to the United States under the exemption system.”

This tax holiday means that the $1.7 trillion of past profits they are holding outside the borders of our country would come in with little or no taxes paid to help pay for schools, roads, and other public needs – or reduce deficits.

Why It Is Important To Be Aware Of This?

This is important because it involves hundreds of billions of tax dollars and millions of jobs, tens of thousands of factories, entire industries and our country’s ability to make a living in the future. It these companies can get out of paying their taxes by moving jobs and factories and profit centers out of the country, they will.

Complexity Helps the Lobbyists and Lawmakers Who Hope the Public Does Not Catch On

It may be that politicians remain open to tax proposals that the public hates because the issues involved are so complicated that they believe no one is paying attention. This makes it vital to call attention to the effects a territorial system would have on ordinary Americans.

The issues are admittedly complicated. For example, Americans have been presented over and over with a very simple story about how the U.S. has a corporate tax that is more burdensome than the corporate taxes of other countries, and that our companies need new rules that make them “competitive” with global competitors.

… On the other hand, there are a number of countries that have extremely low corporate tax rates or no corporate tax at all – mostly very small countries with little actual business activity – where U.S. companies like to claim their profits are generated, in order to avoid U.S. taxes. These are the offshore tax havens that exploit the rule allowing U.S. corporations to “defer” U.S. taxes on their offshore profits. If the U.S. completely exempts these profits from U.S. taxes (in other words, enacts a territorial system) these incentives will be greatly increased.

What The Public Wants

Poll after poll — and the recent election — show that the public overwhelmingly thinks it is time to close corporate tax loopholes, stop the offshoring incentives and get the bigger corporations to step up to the plate and start giving back to the country.

64 percent say large corporations should pay more in taxes than they do now.

78 percent say making sure big corporations pay their fair share of taxes is an important budget goal (55 percent extremely important), and 80 percent say the same about closing tax loopholes that benefit big corporations.

A 73%-25 percent margin approved of closing loopholes that allow corporations and wealthy individuals to avoid paying U.S. taxes by shifting income to overseas tax havens.

A 73%-20 percent margin disapproved of allowing corporations to not pay any U.S. taxes on profits that they earn in foreign countries.

Real Solutions

One solution to the problem of companies holding profits outside of the U.S. is to require American companies to return all profits to the U.S., pay their taxes, and then either use that money to "create jobs" with new factories and research facilities and equipment, etc. or distribute it to shareholders. This would return the $1.7 trillion to the country, would bring the country up to hundreds of billions in tax revenue, and would help the economy through corporate investment or distribution to shareholders.

Use the Tax Code to Incentivize Domestic Manufacturing. Any tax reform package should reshape the tax code in a revenue-neutral way to provide incentives for job creation and inward investment. Research and development tax credits should help firms that not only innovate in America, but also make their products here. We should lower tax rates for manufacturing activity in America and expand up-front expensing for plant and equipment purchases.

First, we should adopt the GOP-favored territorial tax system for profits reported in any country that taxes corporate profits at an average effective rate above some minimum threshold, approximately 15 to 18 percent. With that threshold, U.S. corporations would no longer incur an additional tax burden when repatriating profits from most countries where they legitimately conduct business.

Second, we should adopt President Obama’s proposed “international minimum tax,” equal to that 15 to 18 percent threshold, to minimize profit shifting. Corporations should still be allowed to claim a credit against any actual foreign taxes paid; if a corporation paid 13 percent in taxes to, say, Switzerland, it should only owe to the U.S. the difference between 13 percent and the international minimum tax rate.

In combination, such a compromise would ensure that all foreign profits of U.S. corporations are taxed consistently at a reasonable rate.

A somewhat complicated proposal that addresses the way companies disguise which country they make profits in is to apportion profits according to sales. If a company gets 50 percent of their revenue from sales in the U.S., then the U.S. would tax 50 percent of their profits as U.S.-based, regardless of where the company claims the profits were made. This keeps companies from using tax haven countries as intermediaries in order to claim the bulk of profits are made there. (Bermuda, Google? Really?)

About Dave Johnson

Dave has more than 20 years of technology industry experience. His earlier career included technical positions, including video game design at Atari and Imagic. He was a pioneer in design and development of productivity and educational applications of personal computers. More recently he helped co-found a company developing desktop systems to validate carbon trading in the US.